Tuesday, November 28, 2006

Rate of Change

In meeting with a cleantech entrepreneur recently I was reminded of a fantastic reason to be bullish on the long-term opportunities for innovation in the space. This repeat entrepreneur had built a formidable set of successes in the semiconductor industry. However, he explained he was originally trained as a mechanical engineer and had begun his career tinkering with much larger machines than semiconductors. (Deci-tech, perhaps?) But in the late seventies he decided to switch fields because, as he put it, "the rate of change in semiconductors was so much higher than in any other field."

Interestingly -- and in a very good sign for the future of cleantech innovation and investing -- this entrepreneur was now working on a new project in energy-efficient transportation. Innovation (and innovation-based investing) can only thrive where the potential rate of change is high enough to allow new companies to overcome all the inherent disadvantages of being new companies and still succeed in the marketplace. But potential rate of change is only one part of the equation. Creative, passionate entrepreneurs must be attracted to the field in order to realize that potential and actually drive the changes.

In just the past few weeks I have met with public policy wonks, disk drive manufacturing experts, mathematicians, anti-fraud software entrepreneurs, innumerable successful semiconductor executives and a veritable rocket scientist who have all been attracted to the new rate of change in energy and cleantech and who have decided to commit the next phase of their careers to this emerging trend.

I certainly understand that changing gears like this is never easy, regardless of how much prior success you bring with you. So not all of these entrepreneurs will succeed, and certainly not in their first venture. But the new rate of change in cleantech is attracting ever more brilliant, passionate individuals to the space, and so the next generation of seasoned cleantech entrepreneurs is forming as we speak. There are still several questions to ask before becoming comfortable that cleantech will provide fertile ground for venture investing for years to come: Is demand stable and self-sustaining? Why bother since the nameplate rate of change can never be as high as during the semiconductor boom, and the ROIC can never be as high for the best consumer internet companies? (Some of these questions I hope to address in future posts.)

But committed, passionate entrepreneurs are the sine qua non of disruptive industries. And the rate at which such individuals are currently being attracted to cleantech is the change that may well lay the foundation for many, many years of promising investment opportunities. It may be wise to bet against the wave of Harvard MBA's, but I wouldn't bet against the trickle-turning-to-a-flow of successful entrepreneurs working to boost the rate of change in cleantech.

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Sunday, November 05, 2006

Hummer -- At Least They're Honest

I don't drive a Hummer, and I don't expect I'll ever buy one. But I must admit, I've long been a fan of their advertising. Several of their television commercials have been dialogue-free 60-second cinematic stories that I have found smart and engaging.

By far my favorite is "Happy Jack." The style and camera work makes it seem like it could be a Wes Anderson sequel.

Not quite as good, but still compelling, is "Goldilocks."

But recently, things have taken an odd turn. Like a trailing candidate pulling out the negative advertising as the election approaches, the recent Hummer ads, while stylistically similar to their predecessors, have taken on a blunt, dark tone. Perhaps $3/gallon gas affected their marketing planning a few months ago.

One ad (a copy of which I cannot find online) has a young mother buying a Hummer to compensate for not having stood up to an aggressive mom at the playground. (Can anyone point out an online copy?)

But even stranger is the new "Astronomer" ad. A pencil-necked scientist rushes to trade in his puny electric car for a customized Hummer, once he calculates that an approaching asteroid will destroy the earth in 77 hours.

"We're not saying, we're just saying." Just saying what? The only conclusion I can draw is that they are admitting we all know Hummers are damaging to the environment. But even a gentle, conscientious, data-driven scientist would go buy one, if our actions had no consequences. I am open to any other interpretations anyone would like to suggest.

But perhaps there is good news coming. With the recent drop in gas prices, consumers are once again showing strong interest in gas guzzlers, according to a recent cars.com report. So perhaps Hummer can soon return to witty brand-building, and we'll all be rewarded with high-quality TV in addition to the current few options.

Friday, November 03, 2006

Sausage, Laws and Prop 87

This Tuesday, November 7, Californians face a dizzying array of state and local bond proposals, initiatives and propositions. I am among those who generally believe that the California initiative process is broken, and should be reformed with higher signature hurdles, more funding transparency and greater legislative input both before and after the popular vote. Direct democracy is difficult enough for the 80-odd residents of a New England fishing island gathered in the town chapel. Thirty-three million gathering over optical scanning machines will always be imperfect.

But occasionally there is a proposition that is sufficiently fair-minded and which carries enough promise for real progress on an important issue that I get excited to vote for it. Prop 87, "Alternative energy. Research, production, incentives. Tax on California oil producers," is such a proposition (The Attorney General might consider a tag-based naming system going forward, but that's a different blog post.)

Prop 87 is pretty simple. It charges companies a fee to extract oil from the ground in California, and it uses the funds generated to support alternative energy research in California. Whether these two ideas make sense should be judged independently. If you believe they do, I would recommend supporting 87.

To me, part one is a no-brainer. Every single other oil-producing U.S. state charges companies an extraction fee. California does not. For me, case closed. I was shocked to see the editorials in the SF Chronicle and the LA Times both use twisted logic to play down this point. They argue that since sales and income taxes are higher in California than other states, oil companies are already paying for the right to do business here. Great. By that argument, let's please eliminate the Golden Gate Bridge toll and make parking in San Francisco free. It is so hard to imagine this stilted argument occurring simultaneously in two editorial board rooms, that I end up imagining the newspapers cutting-and-pasting from the Anti-87 brief book. Yes, taxes in California are relatively high to support a broad swath of infrastructure and social programs that have helped make the state the most vibrant and innovative economy in the world. It's hardly a reason to give oil companies a free pass relative to other California businesses and relative to the business standards in other states.

So on to the use of these funds. Is alternative energy research the highest and best use for up to $400 million in new government funds annually? I can respect a lot of arguments which may say no. But there is certainly a nice symmetry and significant upside to investing the funds this way. The hundreds of billions of dollars of value unleashed by the Internet would never have been possible without the hundreds of millions in basic research invested by the government in ARPANET. Today the multi-trillion dollar global energy market faces the need for tremendous innovation if the challenges of developing nation industrialization and urbanization, global warming, U.S. national energy security and finite resources are to be overcome. Government has always had a role to play in funding the basic research related to society's biggest challenges. Energy innovation should be no exception, and the regions which drive this research will benefit disproportionately for generations.

Prop 87 is not perfect. No initiative is. I know some smart people who plan to vote against it simply because the initiative process is so arcane. The process that led to Prop 87 is as ugly as the creation of any law. But it's goals are sufficiently laudable and its implementation sufficiently well thought-through that am actively looking forward to its passage. I cannot be any more eloquent on this point than President Clinton, so I won't try: